Chapter 7.8® - Explanation of Retained Earnings - Dividends & Dividend Dates & Cash Dividends - Recording Journal Entries for Declaration of Dividends
Retained earnings represent accumulated net income or net loss (including all gains and losses), error corrections, and retroactive changes in accounting policy, if any, less accumulated cash dividends, property dividends, stock dividends, and other amounts transferred to contributed capital accounts. If the accumulated losses and distributions of retained earnings exceed the accumulated gains, a deficit will exist.
Reporting Retained Earning:
The statement of retained earnings may include the following:
Nature of Dividends:
A dividend is a distribution of earnings to shareholders in the form of assets or shares.
Relevant Dividend Dates:
Prior to payment, dividends must be formally declared by the board of directors of the corporation. Subsequent to the declaration date, there are three other dates relating to dividends that are important for the investing community.
Date of Declaration:
On the declaration date, the corporation’s board of directors formally announces the dividend declaration.
Date of Record:
The date of the record is the date on which the list of shareholders of record is prepared.
The Ex-dividend date is the day following the date of record.
Date of Payment:
The date of payment follows the declaration date by four to six weeks.
Legality of Dividends:
The requirement that there be retained earnings or certain elements of contributed capital before dividends can be declared.
Cash dividends are the usual form of distributions to shareholders. Before a cash dividend can be paid to common shareholders, appropriate preference dividends, if any, must be paid.
Lets assume that the board of directors of BA company, at its meeting on January 2009, declared a dividend of $0.50 per common share, payable 20 March 2009, to shareholders of record on 1 March 2009. We assume that 10,000 no-par common shares are outstanding.
* Or cash dividends declared, which is later closed to retained earnings.
The cash dividends payable is reported on the balance sheet as a current liability if the duration of the dividend liability is current; otherwise it is a long-term liability.